Real Business Cycles in Emerging Economies: the Role of Interest Rates and Exchange Rates

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Juanyi Jenny Xu
22 Feb 2018 (Thursday)
4:00 - 5:00 pm
IAS2042, 2/F, Lo Ka Chung Building, Lee Shau Kee Campus, HKUST

Eventbrite - Real Business Cycles in Emerging Economies: the Role of Interest Rates and Exchange Rates

Abstract

In this paper, we document the difference in comovement of real exchange rates (RER) with other macroeconomic aggregates between emerging economies and developed small open economies. In particular, we look at the significant and negative correlation between real interest rate and RER in emerging market economies. Using Bayesian estimation, we find that two features are important to explain the results. First, imperfect substitution between home and foreign tradable goods are introduced into standard two-sector models to allow for deviation from law of one price in tradable goods. This helps to generate RER volatility relative to output. Second, the interaction of pecuniary effects of RER changes and collateral constraint on firms' borrowing, which helps to explain the negative correlation between RER and real interest rate and countercyclical real interest rates. A model with these features does well in matching business cycle moments in emerging market economies, including those related to RER.

About the Speaker

Professor Juanyi (Jenny) Xu graduated from Zhejiang University with a B.Sc in Economics in 1996. In 2005 she got her Ph.D in Economics from University of British Columbia in Vancouver, Canada. Before she joined HKUST Department of Economics in 2006, she worked in Simon Fraser University. She is now an Associate Professor in HKUST. Professor Xu maintains an active research program on international macroeconomics and monetary economics. Her research has been focused on the analysis of the optimal monetary policy in open economies, especially for emerging market economies and the study of dollarization and its implication for international monetary policy and transmission of shocks. She is also interested in explaining the real exchange rate dynamics change and the international business cycle in China and other emerging market economies. Her works are published in Economic Journal, Journal of International Economics, and Journal of Development Economics. She has also worked as a research fellow in Hong Kong Institute of Monetary Research.

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